What we try to do here at Capital Ideals and Analysis is take abstract concepts about the market and turn them into something we can trade. if the ideal gets lost in the process, thats alright as long as what emerges is new information about how to trade profitably.
In Elliot Wave theory they have what they call ABC corrections. meaning simply that in a bull market, the market will correct itself to the downside by dropping, having a mild rise (not to new highs) then break the low of the first drop. What i believe ive found is that the MACD histogram will show us a divergence in these ABC patterns. This can also be coupled with ROC 7. It exists in all markets and all timeframes
What we can see here is that in July 2009 the S&P had its first pullback in an ABC corrective wave. The first low was broken and everyone screamed “lower highs, lower lows…must be a bear market.” However, had they been watching the divergence (along with a few other things) they wouldve known quite well that it was just an ABC correction. This same event and psychology took place recently in the beginning of 2010.
To point out that this does not catch all zig-zags ive highlighted the September 2009 pullback. some might note that it looks to have an ABC look to it. Hell, someone more versed in Elliot Wave might tell me it is a ABC correction. That all we had to do was view it on the hourly chart and we’d see the divergence and all. This may or may not be true, i would not know. The point is, we are taking a concept and not just using our eyes and biased opinions but, rather, we are giving such an idea a structure with which we can follow consistently and — somewhat — objectively.
Here is a daily chart of crude oil and a weekly chart of gold for further examples
What we are looking for;
1. A pullback that creates a lower high and lower low
2. A divergence in our indicators to signify that it is not a trend change but trend correction
3. a trend bar that breaks the formations resistance line (or support line in a bear market) which will give us the signal to enter into the market.
4. stops should be placed, at a minimum, a point or so below the trend bar. at maximum below the bottom of wave C.
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